Investing.com - As the Bank of England (BoE) prepares for an important monetary policy announcement later this week, policymakers are struggling with a challenging economic landscape characterized by stubbornly high inflation and a tight labor market. Economists anticipate that the central bank may extend its tightening cycle to address these issues, resulting in higher interest rates than previously expected.
The May consumer price index will be released on Wednesday, just before the BoE's Monetary Policy Committee (MPC) unveils its latest decision on interest rates. Recent data has shown ongoing pressure in the labor market as well as significant underlying inflationary forces, accompanied by generally robust growth momentum.
Yields on British 2-year government bonds reached a 15-year peak at 5% ahead of Thursday's anticipated rate increase announcement – which would mark another 25 basis point hike – while headline CPI inflation was reported at 8.7% year-on-year in April. The Organization for Economic Cooperation and Development predicts that the UK will experience annual headline inflation of 6.9% this year, leading all advanced economies.
Stronger-than-expected labor market figures have further complicated matters for policymakers; unemployment unexpectedly dropped to 3.8%, while regular pay growth exceeded forecasts at 7.2%. In light of these factors, some financial institutions have revised their terminal rate estimates upward; Goldman Sachs (NYSE:GS) now projects a terminal rate of around 5.25%, while BNP Paribas (EPA:BNPP) expects it to reach approximately 5.5%.
Despite growing evidence of persistent inflation and solid economic performance overall, analysts believe that the MPC is likely to maintain its relatively cautious stance due to concerns about over-tightening and potential effects on households from fixed-rate mortgage renewals during Q2 and Q3.
Ultimately, should inflation figures remain troubling, the BoE will face increasing pressure to act decisively – as will the UK Treasury if Prime Minister Boris Johnson's pledge to halve inflation appears unattainable.